Chinese reduce Treasury holdings

Updated: 2013-08-16 11:58

By Michael Barris in New York (China Daily)

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China, which is in the midst of restructuring its economy, reduced holdings of US Treasury securities in June and retained its lead over Japan as the largest foreign creditor to the United States, the US Treasury said.

Overall, total foreign holdings of US Treasuries dropped for the third straight month.

China trimmed its holdings 1.7 percent to $1.28 trillion, while Japan, the second-largest buyer of US debt, cut by 1.8 percent to $1.08 trillion, according to the monthly Treasury International Capital report.

John Praveen, a New Jersey-based analyst, gave several possible reasons for the $21.5 billion drop from May to June in China's US Securities purchases.

He said it may have been driven by a plan to put off buying until yields rise with an improvement in the US economy.

"The fact remains that a lot of other countries have been cutting down their holdings of US Treasury securities," said Praveen, who is chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

"There is a general expectation that Treasury yields are headed up. So why buy now when we can buy when Treasury yields go up to 3.5 percent or 4 percent over the next couple of months?"

Praveen said the US growth rate, now at 2 percent, is "on track" to "accelerate to 2.5 percent, maybe even 3 percent growth" in the year ahead. "So naturally stronger growth will mean that Treasury yields (which move inversely to price), will have to go up," he said.

He also said that the reduction in China's purchases of US Securities could mean that the country's resources for such purchases are shrinking, amid its transition to an economy driven by consumption rather than investment and exports.

"If you're not an export-driven economy and you are more of a consumer-driven economy, your exports will come down, your imports will increase, so your current account deficit will come down," Praveen said. "So they have less money to invest. It may be part of that overall strategy, of reducing how much money they put into the US Treasury market.

"I'm not saying that is going to happen right now," Praveen said. "They're still buying. They will probably continue to buy, but at a slower pace."

Praveen said the reduction in China's Treasury buying might also reflect a desire to diversify its holdings.

On Thursday, a drop in US Treasuries pushed yields on 10- and 30-year securities to the highest level since August 2011, on speculation stronger US growth would prompt the Fed to reduce bond buying - an economic stimulus effort known as quantitative easing, or "QE" - as soon as next month.

(China Daily USA 08/16/2013 page1)